One of the more critical elements of a commercial construction loan is being able to accurately forecast or predict the commercial construction loan amount that you can expect to secure for your project.
Not having a good, sound understanding of what this looks like can create problems for you and even kill your project altogether if you get started on your own and find out later into the project that the funds you thought you would be able to secure are not available.
The other thing to keep in mind is while I can provide a general guideline to get you started, every project is unique unto itself and every source of construction mortgages will have their own ways to determine their interest in financing a particular project.
That being said, here are some basic guidelines for calculating the potential commercial construction loan amount for any given project.
In very basic terms, without knowing anything about a particular project, its location, and so on, property owner, developer, or builder can expect that a commercial construction lender will consider viable projects at between 65% to 70% loan to value.
That tells us that the project is going to need to have a minimum equity amount of 30% to 35% at all stages of the project.
The second thing to understand is that the lender is going to determine the loan to value amounts based on market value appraisal at any given point and not the cost estimate or budget for the project.
This is an important item of clarification in that what someone builds may suit their own needs, or the needs of their tenants, but may not translate into a market value equal to or higher than the cost of construction.
As an example, lets assume that you have a commercial construction project in the works with a construction budget of $7,000,000 and the “as is” property value currently at $500,000.
There is no guarantee here that a commercial property appraisal on the proposed plans and budget will come back with a value of $7,500,000 on the completed build and real estate.
Any number lower than $7.5M will require either a large cash investment in the property, or the pledge of additional security to provide a higher security value to lend against.
At the same time, its also possible, that the end construction value is higher than the cost to construction, which may see the lender providing a higher portion of the construction costs.
But even in this last scenario, its going to be important as to what the lender is going to require you to invest in cash and to what stage of development, before they are going to be prepared to advance any money into the project.
And this is where it can be tricky to assess ahead of time what the market value of the project will be at different stages of development as well as how a construction lender will interpret the relevant risk and potential loan exposure they will be comfortable with.
To better understand the commercial construction loan amount that can be made available to a project you are planning or one you are in the middle of, I suggest that you give me a call so we can go through your requirements together, and discuss different funding options and amounts that may be available to you.